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Economic Dialogue with Greece

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Economic Dialogue with Greece IPOL DIRECTORATE-GENERAL FOR INTERNAL POLICIES EGOV ECONOMIC GOVERNANCE SUPPORT UNIT I N-D EPT H ANALYSIS Economic Dialogue with Greece ECON on 2 March 2016 This note presents selected information on the current status of the EU economic governance procedures and related relevant information in view of an Economic Dialogue with Mr Euclid Tsakalotos, Minister of Finance of the Hellenic Republic, in accordance with the EU legal framework, in particular Article 2a of EU Regulation 1467 as amended by Regulation 1177/2011 and Article 7(10) of EU Regulation 472/2013.This briefing is an update on a previous briefing on Greece’s Financial Assistance Programme. 1. Latest economic developments After returning to growth in 2014 and showing unexpected resilience during the first half of 2015, Greece's economy has slipped back into recession in the second half of 2015 reflecting sharp deterioration in confidence, renewed stress within the banking system (which led to imposition of capital controls1 in June 2015) and uncertainty stemming from prolonged negotiations in the context of Greece programme review(s). According to Eurostat's preliminary data, the Greek economy contracted by 1.4% q-o-q in Q3 2015 and 0.6% q-o-q in Q4 2015. If confirmed, this data would bring real GDP contraction to 0.7% for 2015 as a whole (as compared to a 0.0% real GDP growth expected by the European Commission (COM) in the winter 2016 forecast2). Looking ahead, negative carryover effects from 2015 are to weigh on output dynamics in 2016 (-0.7%) before a progressive rebound in confidence, along the 'expected easing of capital controls and compliance with the conditionality of the new ESM assistance programme', helps the Greek economy to return to growth in 2017 (+2.7 %). Note that between 2007 and 2015 (provisional data), the size of the Greek economy shrank by more than 26%. Inflation, as measured by headline Harmonised Index of Consumer Prices (HICP), remained negative in 2015 for a third year in a row at -1.1%. This price decline reflects the negative effects of weak demand and lower energy prices which more than offset the impact of VAT increases implemented in summer 2015. For 20163 and 2017, the COM projects HICP inflation to return to the positive territory, 0.5% and 0.8% respectively, as Greece's economy is expected to gradually return to growth. Current account deficit is projected to narrow to 1.8% of GDP in 2015 reflecting predominantly a sharp contraction in imports. Moreover, the COM foresees further improvements 1 On 29 June 2015, the Greek Government imposed capital controls to avert a collapse of its banking system. While it is still unclear for how long these controls will remain in place, they were somewhat eased in mid-August 2015. 2 In its October 2015 World Economic Outlook, the IMF expects Greece real GDP to drop by 2.3% in 2015 and 1.3% in 2016. The updated January 2016 World Economic Outlook only shows projections for the euro area as a whole and its major economies, but not Greece. 3 According to the latest monthly Eurostat data, annual HICP inflation declined from 0.4% in December 2015 to -0.1% in January 2016. 1 March 2016 Contact: [email protected] PE 574.397 Authors: J. Angerer, M. Hradiský, M. Ciucci, B. Mesnard, J. Vega Bordell and A. Zoppé. in Greece's current account for 2016 and 2017, with deficit declining to 1.4% and 0.9% of GDP respectively, as 'past and ongoing structural reforms improve external competitiveness'. Unemployment is expected to further decline from very high levels over the period 2015-2017, mirroring output developments with a lag. According to the latest COM projections, the unemployment rate is to decline to 25.1% in 2015, 24.0% in 2016 and 22.8% in 2017. As to montly data, after peaking at 27.9 % in September 2013, the unemployment rate stood at 24.5 % in October 20154. The youth unemployment rate declined from a record high of 60.5 % in February 2013 to 48.6 % in October 2015. Indeed, as shown in a recent EP study "Employment and social developments in Greece", 'unemployment and poverty mostly hit younger people for whom a system focused on pensions offers no help'. At the same time, this study concludes that actions agreed under the third economic adjustment programme aim at completing the unfinished reform agenda since 2010, while addressing criticism against earlier programmes. General government deficit is expected to widen to 7.6 % of GDP in 2015, according to the COM winter 2016 forecast, reflecting the negative impact of uncertainty and economic downturn on public finances as well as the effect of one-off recapitalisation measure of the banking sector completed in late 2015 (provisionally estimated at 3.3% of GDP). Going forward, the headline deficit is projected to gradually narrow over the forecast horizon to 3.4% of GDP in 2016 and 2.1 % of GDP in 2017, assuming that primary balance targets set under the ESM programme (see section 2) are met. The significant differences and changes of the estimates for the 2015 government deficit and primary balance are an issue: The COM estimates in its winter forecast from January 2016 that the primary budget balance was -3.5% in 2015 (which falls significantly short of the target of -0.25% of GDP), while the latest published IMF figures on Greece (October 2015) estimated a primary budget balance of -0.5% for 2015 (which is also a shortfall compared to the target). The Greek newspaper To Vima reported on 29 February 2016 that there remain major gaps between Greece and the eurozone on the one side and the IMF on the other. “The government and the COM agreed that Greece reached a surplus (note of EGOV: primary surplus must be meant) of 0.2% of GDP with a marginal decline. The IMF instead had a primary deficit of 0.6% with a decline of 2%. Deputy finance minister George Chouliarakis said these numbers are “completely arbitrary“ and wants the fund to clarify its intentions. (…) The return of the institutions will now be decided at a higher political level, possibly at the Eurogroup meeting on March 7.” The COM expects general government gross debt to stand at 179% of GDP in 2015, before peaking at 185% of GDP in 20165. This is substantially below the peak of 199.7% of GDP projected in the COM's autumn 2015 forecast as the cost of banks' recapitalisation turned out to be lower than expected. The distribution of the outstanding debt across different categories of bondholders is depicted in Figure 1. Note that, in absence of consolidated 2015 general government gross debt data as yet, cash data for central government is used as a proxy (EUR 321.3 billion as of 31 December 201567). The figure shows that the share of Greece's debt held by the Euro area governments (including 4 The Eurostat data as of 2 February 2016. 5 This compares with 201% of GDP assumed for 2016 in the European institutions Debt Sustainability Analysis (DSA) of July 2015. 6 For example, the outstanding central government debt at the end of 2014 amounted to EUR 324.1 billion, while the consolidated general government debt was EUR 317.7 billion at the end of 2014. 7 According to a Reuters article of 8 October 2015, "two thirds of Greek debt is now held by euro-zone governments that extended loans to Athens with an average maturity of 31-32 years and an interest rate of around 1 percent". PE 574.397 2 EFSF and ESM) stood at around 64 percent as of December 2015 (+ 4 percentage points compared to end 2014) as new funds were transferred under the third adjustment programme. At the same time, the shares of debt held by the IMF and the ECB stood at 5% each (namely 1.5 and 2 percentage points lower compared to end 2014 respectively) as bonds/loans coming to maturity during 2015 were reimbursed. Figure 1: Greece's central government debt by holder as of 31. December 2015 Others; 25% Bank of Greece; 1% Euro area ECB; 5% Governments; 64% IMF; 5% Source: EGOV calculations based on COM, IMF, ECB and PDMA (Greece's Public Debt Management Agency). Note: The share held by euro area governments comprises EFSF, ESM and bilateral loans. Box 1: Statistics The European Statistical Governance Advisory Board (ESGAB), as the body responsible for overseeing the implementation of the European Statistics Code of Practice with the aim of enhancing professional inde- pendence, integrity and accountability, issued in 2015 an Opinion on the implementation of the Hellenic Sta- tistical Law (3832/2010) and Greece’s commitment on confidence in statistics. It recognised in this opinion considerable progress since 2009, but it also highlighted the following concerns: The principle of professional independence must be implemented in practice. The relevant legislation and rules are in place but they need to be fully implemented, with the clear and active support of the government. The forthcoming amendment of Regulation (EC) No 223/2009 on European statistics will further emphasise the role and position of the heads of national statistical institutes, by adding a requirement that the procedure for appointing institute heads is transparent and based on professional criteria. The Greek Government’s commitment on confidence in statistics must be respected and put into practice, particularly in relation to ensuring institutional independence and providing adequate financial and other resources. More specifically, the Hellenic Statistical Authority (ELSTAT) must be able to recruit and maintain a sufficiently qualified workforce.
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